Virulent Word of Mouse

April 23, 2014

The Fault Lines Along Fast Lanes

highwayUntil recently, a fast lane from a broadband ISP was a remote possibility in the US. ISPs had to give data equal treatment, regardless of the source, and could not offer faster delivery for a higher price while giving slower service as a default.

Although fast lanes were allowed by regulators a few years ago in the wireless networks, the carriers hesitated to offer them. In December 2013, AT&T Wireless broke with the norm and announced just such a program. FCC regulations forbidding fast lanes at landline broadband ISPs had also prevented them, but a January 2014 US appeals courts struck down those regulations.

Is that a good or bad trend? The answer depends on who’s talking. Critics of government regulation despise the rules forbidding fast lanes, whereas net neutrality supporters view the presence of fast lanes as a nightmare come to life.

Legal and political aspects of this topic typically get most of the attention, as do the implications for the variety of speech online. Most reporters find these aspects interesting, and understand them. However, the economics of fast lanes receives less attention. That is a surprise, because the economics is not very difficult, and it’s worth understanding. It illuminates the fault lines between many different points of view.

Mirrors and servers

The public Internet has evolved considerably since the days when the design for packet networks presumed that the message did not have to arrive at an inbox immediately. Users today prefer and expect speedier services. That goes for more than just IP telephony and video chat, where users notice the smallest delay. It also holds true for video, such as YouTube and many online games. Many providers believe it also affects the bottom line—namely, that users switch services if they do not get fast delivery of data.

Long before fast lanes became a real possibility, many participants in the Internet made investments aimed at reducing delays. For example, for some time now, Akamai has sold a well-known approach to improving speed. Their service also defines the first fault line, so this is a good place to start the discussion. Opponents to net neutrality ask why Akamai can operate a business to speed up data delivery but a carrier cannot.

Akamai’s service supports servers inside ISPs, closer to households. Any seriously large Internet content firm must buy these services, and it is considered a cost of doing business online. Many ISPs like working with Akamai, because their customers experience better service without much investment from the ISP.

That is not the only method for speeding up data. For example, Google has bypassed Akamai’s charges in many locations by building its own data network to ISPs. Netflix has recently sought to do the same, though it is not quite done (because it has not successfully negotiated a presence with every US ISP). Any gathering of more than three Internet engineers will generate discussion of even more potential solutions in the cloud. Amazon built a content delivery network with enormous geographic range. Microsoft has similar investments and aspirations, as does IBM. The list goes on.

That leads to the deeper question. The last few years have witnessed robust experimentation among distinct approaches to functional improvement, and these might be either complements to, or substitutes for, each other. Accordingly, carriers have had two roles. They act as a firm whose users benefit from faster delivery, and they act as a supplier that could choose to cooperate—or refuse to cooperate—with solutions offered by others.

When a carrier had no investments in fast lanes, it had every reason to cooperate with solutions offered by others. Will that change if the carrier has its own fast lane?

The answer defines a fault line between points of view. Some observers label this a possibility that might never arise. They want a regulatory response only when a problem emerges, and otherwise they anticipate that a regulator will err. Net neutrality supporters think regulators have an obligation to protect the Internet. Advocates worry that introducing fast lanes messes with a system that already works well. They do not trust carriers to cooperate with solutions that might substitute for a fast lane business or threaten an investment in some way.

Competition and monopoly

The next fault line has to do with the role of money. Defenders of fast lanes expect them to become a cost of doing business for content firms, and forecast that fast lanes will be profitable and generate more investment. Opponents have the same forecast about profitability, but a different interpretation. They worry that fast lanes will lead to an Internet where only rich firms can deliver their content effectively.

This concern tends to get plenty of press, and a few rhetorical questions illuminate the fault line. Will the default speeds offered by ISPs be good enough for startups or for small specialty websites? One side believes that the defaults will be good enough, whereas the other believes that fast lanes will lead ISPs to neglect investing in their slow services.

One’s point of view about the state of competition for ISPs has a big role in interpreting the role of money. Some believe a competitive ISP market would melt away most problems. Others argue that belief about competitive ISP markets is a fantasy and masks many dangers.

The belief in competition is not a belief in magic, so it is worth examining. Rather, this side views competition as a painful process. In competitive markets, customers substitute into alternatives if they do not like what a supplier does. Suppliers hesitate to do things that make their users angry. In other words, ISPs would compete for customers by offering better fast lanes. In this view, users would get angry if they perceived that carriers were slowing down content from firms they cared about, and angry users would find another carrier.

Where is the fault line? Recognize the two key factors that make ideal competitive markets operate well—namely, transparency and the availability of many user options.

Just about everybody is in favor of transparency, but not necessarily more of it if rules require it. Those with faith in competitive processes tend to see the merits in nothing more than a few light-handed requirements, such as programs to facilitate measuring the speed of different ISPs. The other side asks for much more, such as the publication of all fast lane contracts (more on that later).

As for the second concern about options, consider the key open question: Do users have many options available to them, or do they face de facto monopoly ISP markets? Once again, there are different beliefs about the preponderance of competition and monopoly found throughout locales of the US. Those who presume that competition is inadequate lack sympathy for leaving ISPs alone (versus those who presume it is adequate).

That also leads to different interpretation about how lucrative fast lanes will be. Supporters of fast lanes say that ISPs should charge whatever the market will bear, and competition will discipline pricing. Opponents say that the monopolies emerged from granting public franchises and use of public rights of way, and characterize high prices as misuse of utility franchises.

A classic debate about government merger policy also arises. Net neutrality supporters argue that fast lanes give ISPs artificial incentives to consolidate in order to increase their bargaining leverage with content providers, thus concentrating economic power in ISPs. Net neutrality opponents do not see anything wrong with large ISPs. In a competitive market, size is irrelevant.

Mixed incentives

The foregoing leads into the last fault line in discussions about fast lanes—namely, views about mixed incentives at carriers. A mixed incentive arises when a carrier distributes a service that substitutes for one available on the public Internet.

Many broadband ISPs have a thriving broadband service and provide video on demand, and make a pretty good margin on both services. Will most cable firms want to sell a fast lane service to Netflix at a low price? If the carrier did not make money on video on demand, then a carrier’s price for a fast lane for Netflix would be lower, and the same goes for entrepreneurial firms offering video services. That also begins to suggest the intuition behind the concern that cable firms will tilt their other actions against online video to protect their existing businesses.

Mixed incentives also come up in discussions about scrutinizing carrier contracting practices. To put this fault line in perspective, consider a hypothetical scenario: What would happen after a carrier sells a fast lane to, say, ESPN? Can anyone else expect the same terms, even Netflix? Yet again, one side argues that competition will solve these issues, and the other sees a need for regulatory intervention to make terms of fast lane contracts public.

A mixed incentive also can emerge when a carrier has an economic incentive to protect its partner’s business in which it gets a cut. In other words, is it okay if ESPN gets a better deal than Fox Sports because an ISP made a deal with the local team who competes with something done by Fox Sports? The same fault line as just mentioned: should competition solve this question, or should governments intervene to publish fast lane contracts? Should ISPs be required to give the same terms to all takers?

To summarize, the fault lines between perspectives hinge crucially on several beliefs about the economics. Forecasts depend on whether the observer sees a preponderance of competitive or monopoly markets for ISP services. They also depend on whether transparency resolves potential problems.

 

Copyright held by IEEE. To view the original, see here.

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March 7, 2014

The Irony of Public Funding

Misunderstandings and misstatements perennially pervade any debate about public funding of research and development. That must be so for any topic involving public money, almost by definition, but arguments about funding for scientific research and development contain a unique and special irony.apache-logo

Well-working government funding is, by definition, difficult to assess, because of two criteria common to subsidies for R&D at virtually all western governments: specifically, governments seek to fund activities yielding large benefits, and these activities should be actions not otherwise undertaken by the private sector.

The first action leads government funders to avoid funding scientific research with low rates of return. That sounds good because it avoids wasting money. However, combining it with the second criteria does some funny things. If private firms only fund scientific R&D, where the rate of return can be measured precisely, government funding tends to fund activities where returns are imprecisely measured.

That is the irony of government funding of science. Governments tend to fund scientific research in precisely the areas where the returns are believed to be high, but where there is little data to confirm or refute the belief.

ApacheThis month’s column will illustrate, with a little example, the server software Apache. As explained in a prior column (“How Much Apache?”), Apache was borne and invented with government funding. Today, it is rather large and taken for granted. But how valuable is it? What was the rate of return on this publically funded invention? It has been difficult to measure.

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January 12, 2014

How Much Apache?

Filed under: Academic Research,Essays,Internet economics — Shane Greenstein @ 4:48 pm

Apache-software-FoundationAlmost with inexorable momentum, the Internet hurls itself into new territory. Some time ago, more than two billion humans had adopted at least one Internet-enabled device in some form, and nobody doubts that another two billion will accrue soon. New webpages increasingly find ways to inform readers, as more information in a variety of formats continues to be layered on the basic system of data internetworking.

That growth has been measured in a variety of dimensions. Today I would like to report on some research to measure one aspect of the Web’s growth, which I did with Frank Nagle, a doctoral student at Harvard Business School. We sought to figure out how much Apache served web surfers in the United States.Apache

That is not a misprint. Apache is the name for the most popular webserver in the world. It is believed to be the second most popular open source project after Linux.

Why do this? Measuring Apache is a key step in understanding the underlying economics. Because it’s free, Apache’s value is easy to mismeasure, and that makes its economics easy to misunderstand. (more…)

September 27, 2013

Digital Public Goods

Precisely how does the online world provide public goods? That is the question for this DSC_1021column.

Public goods in the digital world contain some of the same features as those in the offline world. Yet, there are some key differences in the boundaries between public and private, and that shapes what arises and what does not.

That will need an explanation. (more…)

July 1, 2013

Information Technology in the Desert

Filed under: Amusing diversions,Essays,We call it life — Shane Greenstein @ 8:09 pm

Every summer my wife and I take the children west to experience nature at its grandest. Though these trips are designed to foster “quality family time,” invariably they teach us more about ourselves than merely about nature. In previous posts I have used these trips to learn something new about the role of information and communications technology in our lives.DSC_0880

This year we visited the southwest. The Hoover Dam served as appetizers then we turned to the main course –Zion, Bryce and the Grand Canyon. The Petrified Forest and the Painted Desert served as dessert. Yes, indeed, the desert was dessert. (Sure, it was clumsy, but worth the artlessness nonetheless. How many times in your life do you ever get to put those two words in one sentence?)

This year I learned two kinds of lessons. One was about connectivity, while the other was about prediction. That is not obvious, to be sure. Give me a minute. I will get there. (more…)

June 20, 2013

Differentiated Platforms

Differentiation is a standard concept for analyzing competition. It describes a common situation, where one firm develops the ability to serve one type of customer in a market—say, buyers who will pay a lot to save time—while a competing firm serves another—say, budget-conscious buyers who are patient.

differentiated microchipsDifferentiation can describe common competitive behavior in technology markets. A chip firm might develop particular attributes—say, faster, energy-hungry electronics for a particular purpose—while their rival might specialize in slower chips that use little energy. This differentiation can earn each firm loyalty from buyers with different preferences.

That motivates today’s question: Can platforms differentiate? Platforms have played an increasingly important role in technology markets in the last decade—in mobile devices, in web services, you name it. A mix of standards composes a platform, complementing many other firms who build services upon the standards.windows evolution

At first blush the answer appears to be yes. Think of attributes associated with common platforms, such as Windows, Android, Linux, Facebook, or the iPhone. These platforms differ from one another in the marketplace and set themselves apart from near rivals, in ways that earn the loyalty of particular users.

That first impression makes it worth a deeper look. There is more here than meets the eye, and smart firms shape their strategies with subtle thoughtfulness. (more…)

May 12, 2013

The revolution will be televised: A teaching moment.

Filed under: Amusing diversions,biography,Essays,We call it life — Shane Greenstein @ 10:02 pm

As a parent I view the modern era of hyper-connection as an infinite opportunity for teaching moments. My children humor my pursuit, bless them. I do worry that they perceive their father’s aspirations as random outbursts of unconnected insights, barely Gil-Scott-Heron-002 (1)distinguishable from the indecipherable utterings in Ezekiel’s visions, and vested with much less authority. Yet, I persist.

On a recent Saturday I became a taxi driver for my oldest son, and drove him home from the gym. Something by Gil-Scott Heron came up on the bop jazz channel on the car’s satellite radio. Heron’s rebellious expressions made him famous, but today the radio played themes of love. It was one of Heron’s earlier and milder pieces.

The jockeys experiment on this channel on the weekends, taking the music to the edges, though this hardly qualified as an edge. Though Heron is not regarded as a jazz pioneer in most circles, the beat poets influenced him, and he borrowed many of their rebellious forms for individualized expressions.

My son stared out the window, rendered silent by one of those adolescent moods in which sentences never exceed three words. Sometimes the mood can last for months.

gil-scott-heron-the-revolution-will-not-be-televisedLooking for an opening, I faked surprise. “Well, look at that.” I said with an upbeat tone, “It is Gil Scott-Heron.” This registered nothing from the passenger seat, not even a curious question, such as “Who is Gil Scott-Heron?” Was my son listening or descending into a month-long silence? He remained motionless.

A father has to be intellectual resourceful at these moments. I gambled, and issued an overstatement that I hoped might catch his attention. “Some people regard Gil Scott-Heron as the father of Hip-Hop and Rap.” If my son was at all paying attention, he would regard this sentence as a stretch, at best. The present song more closely resembled a male rendition of something acceptable to Ella Fiztgerald. Nothing about this love song would suggest such a radical interpretation. Still, the music contained enough rhythm to be catchy. My son stirred, and I sensed he was listening to me.

If the hook was in, then perhaps he would take the bait. “His most famous song was something called ‘The revolution will not be televised.’ Have you ever heard of that?”

“No.” My son shifted his weight while answering. Maybe I had him. This is what passes for a teaching moment in the suburbs.

“I will play it for you when we get home.” I promised, “You might like it.” No sound came from son, and we drove on. (more…)

April 4, 2013

The On Line Honesty Box

Filed under: Considering topical questions,Essays,Internet economics — Shane Greenstein @ 8:43 pm

Many vendors give away free services, but usually there is a catch. For example, while Google has given away search services for moreRadiohead
than a decade, no user has any illusions as to why. Advertising buys space and tries to reach readers. As another example, for many years US cellular carriers came close to giving away handsets to customers (until expensive smartphones reduced the practice). Buyers knew these subsidies came with two-year commitments, and buyers could anticipate giving the carrier high service fees.

Free services without any apparent catches are rare, but it seems to happen with “honesty boxes.” It has always been so with street musicians. A listener can walk away or give any amount into an open hat—from nothing to any denomination of bill. Public campsites cards-against-humanityhave relied on honesty boxes for years, letting campers fill out their permits, paying on their
honor. Office coffee pools frequently use honesty boxes as well.

What about the online world? There have been experiments with online honesty boxes. The lessons are quirky, but too interesting to ignore. Today’s column describes two—one from Radiohead, and another from Cards Against Humanity.

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September 6, 2012

Calm Economics

Filed under: Considering topical questions,Essays — Shane Greenstein @ 7:24 pm

Calm economics is a flavor of economics that prizes insight developed under the auspices of calm deliberation. Many participants in tech markets today digest calm economics daily. They know it when they see it in the Wall Street analysis, or during investor meetings, like the ones Warren Buffet conducts.

Look, I call this “calm economics” for lack of a better phrase, but the point goes beyond labels. Despite its pervasiveness, many engineers and managers find calm economics to be elusive. Especially when calm economics uses too much jargon or dry abstraction, readers find it challenging to discriminate between the good and otherwise. Yet, doing so can help formulate a firm’s strategy or analyze the market potential for profitability. Calm economics underlay fundamental questions in a wide set of circumstances.

There is no need to guess at the difference between the good and the pretender. It is possible to be systematic. As a step toward developing recognition for it, this column identifies several symptoms of calm economics done well. (more…)

May 6, 2012

Free Podcasts

Filed under: Essays,Uncategorized — Shane Greenstein @ 3:25 pm
Tags: ,

Some folk like to read blogs. Some folk like to listen to podcasts. Why not give everyone the option to do what they prefer? Now it is possible to read or listen to many of the essays that appear in my IEEE Micro Economics column (and appear here as Essays).

The IEEE deserves credit for this initiative. They have started a program to record podcasts from their many columnists.  Kellogg’s Tim DeChant has helped me record more than a dozen (Thanks Tim!). There should be close to two dozen by the end of the year. Anyone can download them at IEEE’s Computing Now for free. Brandi Ortega manages the site (Thanks Brandi!). They also can be found on iTunes at no charge. Available so far are:

* Steve Jobs and the Economics of One Entrepreneur
* Direction of Broadband Spillover
* Digital Dark Matter
* Building Broadband Ahead of Digital Demand
* Gatekeeping Economics
* Digitization and Value Creation
* Standardization and Coordination
* Bleeding-Edge Mass Market Standards
* The Next Chapter at Google
* Network of Platforms
* Does Google Have Too Much Money?
* Soccer Mom Messaging Is the Poetry of Our Age
* Revolution in Spectrum Allocation

Please enjoy them!

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